Peru presses ahead with PPP plans despite scandal

The Peruvian government is expected to go ahead this year with public-private partnerships (PPPs) in social infrastructure despite a massive corruption scandal that is paralysing some of the country’s biggest construction projects.

Pedro Pablo Kuczynski (PPK), who assumed the presidency on 28 July last year and represents the right-wing Peruvians for Change political party, has made improving infrastructure one of his administration’s main goals.

Peru – which has a $192bn economy and a population of 30 million – has pursued a markets-friendly economic policy for almost two decades. Since the presidency of Alberto Fujimori (1990 to 2000), the government has granted private firms concessions to build and run infrastructure projects.

A strong consensus across the political spectrum exists in favour of PPPs and private concessions, despite a huge scandal breaking this year over Odebrecht, the giant Brazilian construction group. Peruvian prosecutors accuse the company of paying kickbacks to associates of Alejandro Toledo, the country’s president between 2001 and 2006 (PPK was prime minister between 2005 and 2006).

Under a plea bargain arrangement, Odebrecht admitted to paying bribes between 2005 and 2014 to win contracts to build roads, metro lines, pipelines and hydroelectric plants. The corruption could stretch over three administrations, including those of presidents Alan García and Ollanta Humala, as well.

International contagion

In Peru, Odebrecht has won public work contracts valued at more than $10bn. The Odebrecht scandal began in 2014 as a money laundering investigation in Brazil, but has now engulfed many Latin American countries where the company operates. 

It was a member of the consortia behind seven concessions in Peru: highway projects called Rutas de Lima, IIRSA Norte and IIRSA Sur (two sections); the hydroelectric plant called Chaglla; the canal at Chavimochic; and the irrigation project called Olmos. 

At the start of February, the government cancelled a massive $7bn project to construct a gas pipeline in the south of the country, known as Gasoducto del Sur, led by Odebrecht. This is the largest infrastructure project in the country’s history, stretching 1000km, and its paralysis has put 15,000 people out of work. 

The government is putting the whole project out to tender again and that could take between one year and 15 months.

Political fallout

“The scandal has created a big political problem for PPK,” says Michael Shifter, president of the Inter-American Dialogue, a Washington DC-based think tank. “I believe the PPPs will be extended to social infrastructure, as almost all the country’s political leaders favour them. But PPK’s popularity has collapsed and it will now be a lot harder for his government to overhaul taxation and the civil service as he proposed.”

Graña y Montero, Peru’s biggest construction group, is also fighting allegations that it was aware of the kickbacks Odebrecht. At the end of February, the company’s chairman, chief executive and another senior director were all forced to resign as its share price plummeted by up to 50%.

“The scandal is now consuming a lot of the government’s energy,” says Adam Collins, a Latin American economist at Capital Economics, a London-based economics consultancy. “It is already affecting the investment climate in the country but it is not yet clear whether it has led to a collapse in business confidence.”

It has also paralysed Chavimochic III, the third stage of a 280km canal project diverting the river Santa in the Libertad region in north-west Peru and worth $700m in investment. Odebrecht and Graña y Montero were leading the consortium. Experts say the government could quickly award a new contract to complete the construction, because it was financed by the state and is already well advanced.

Other projects that have been put on hold include road improvements in the city of Cusco (known as Consorcio Vías de Cusco); the $590m toll roads programme in Lima (called Concesionaria Rutas de Lima); and the $92m Costa Verde coastal highway (Callao section), leading to the second terminal at Lima’s international airport.

Opportunity knocks

However, all the disruption creates opportunities for other companies – including international groups – which could take part in the consortia that win the retendered concessions. Ashmore Investment Management, the London-based emerging markets manager behind the Andean Infrastructure Fund, is contemplating whether or not to take part in the fresh bidding rounds.

“Some of the projects are well advanced,” says Jan Dehn, head of research at Ashmore. “We would certainly consider stepping in but would have to undertake thorough due diligence. PPK seems highly committed to the PPP programme and focused on the execution of these projects.”

According to the National Association for Infrastructure Development, Peru suffers from a massive infrastructure gap of $142bn (estimated for the years 2012 to 2021), and PPPs will play a major role in helping to plug it. This estimate includes $33bn in energy projects, $36bn in transportation, $19bn in telecommunications and $8.6bn in irrigation projects.

The country now enjoys a solid legal framework for the application of the PPP model. The state backs many projects financially. This could take the form of an initial subsidy for some of the construction outlay or a financial contribution that the government makes every year to cover the original construction costs and maintenance and operational expenses.

Power of attraction

“The fact that the government captures some of the investment risk will encourage international investors to back the infrastructure projects despite the Odebrecht scandal,” says Adrián Garza, a senior analyst in the infrastructure group at Moody’s.

PPK’s government is also strengthening Proinversión, the government agency that oversees the tendering process. Its capabilities will be extended so that it is more involved in monitoring a project’s progress.

“We have seen some regulatory creep in Peru,” says Lisa Schineller, director of sovereign ratings at Standard & Poor’s. “Proinversión is being made more transparent. It should become more streamlined and work better with local government.”

The Odebrecht scandal has shaken confidence in PPK’s administration. Many experts expected his government to be highly markets-friendly and eventually bring the country’s economic growth up to 5%. The likelihood is that the government will now have to be less ambitious about structural reform, but that the extensive PPP programme will continue.